Wednesday, March 18, 2009

THE AGE OF PYRAMIDS

Following up a bit from yesterday's discussion, as the latest Federal Open Market Committee continues, the Fed is apparently wondering what to do (since it can't lower interest rates that are already at or essentially at zero, and it clearly sees "do nothing" as a non-option). Among the options it's bouncing around:

* hold its lending rate between zero and 0.25 percent for the rest of this year and for most -- if not all of -- next year

* spur lending for auto, education, credit card and other consumer loans. The Fed later this month will start providing up to $200 billion in financing to investors to buy up such debt

As Applesaucer explained so eloquently in yesterday's comments, all of these options amount -- in the end -- to nothing other than the creation of "money" from thin air. Some destroy the Fed's balance sheet more than others. Some "stimulate" the GDP more than others, but in the end they devalue the currency, and add nothing of value to the economy. If the government decrees today that at the snap of the finger everyone now has twice as many dollars as he had when he woke this morning you're not one cent richer.

But debtors -- including, of course, the U.S. Treasury and the Federal Reserve -- can pay their obligations in the watered-down currency that creditors (including you, as a holder of Federal Reseve Notes, also known as dollar bills) are legally required to accept as "tender for all debts, public and private."

Whatever the FOMC decides today, or in the near future, remember that they're just figuring out the best way to perpetuate the ponzi scheme. And robbing you blind in the process.

7 Comments:

Devaluing the dollar does have some positive aspects, including making exports more attractive. I like seeing Michigan made Buicks exported to China. Unfortunately it also makes paying off all that debt to others countries way more expensive.

This sucks. All the balance sheet thieves can clear their debts with this new, more worthless money, but everything WE buy will cost more, and I don't anticipate getting a raise anytime soon to pay for it. How 'bout the rest of you?

"Devaluing the dollar does have some positive aspects, including making exports more attractive..."

IMHO, there's nothing good about a country devaluing its currency, unless it's the natural consequence of removing a peg. (for instance, the UK and the Untied States would have been better off in the interwar period if the UK had simply allowed the pound to float against the dollar and gold, instead of jointly sticking to a plan to keep the pound artificially high against the dollar (and thus gold). The US Fed printed a bunch of dollars to defend the Bank of England's gold stock, which precipitated a US real estate and stock market bubble, followed by the bust and subsequent bank runs).

I can't think of a country that's ever debased it's way to prospertiy, except in the very short term.

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By the way, regarding AIG, maybe you pointed this out, but, if not, note that AIG's CEO is (1) Bush Administration appointed, as part of the Geithner, Paulson, Blankfein engineered AIG bailout; and (2) picked directly off the Goldman Sachs Board of Directors.

I forgot to add that I think Mr. Furious hits on something very important here: the Fed, Wall St. and many establishment economists repeat the mantra "we don't have to worry about inflation until there's wage inflation." Notice, also, that they often emphasize "core CPI" -- which eliminates energy and food prices -- over "CPI" -- which does not.

In other words, they cheerlead Fed inflating (as I define it) but call it something else, just up to the point where it reaches the wage earner. And then there's a problem.

Unfortunately it also makes paying off all that debt to others countries way more expensive.

In theory, yes. In practice no:

1. The dollar is the world's reserve currency, so debtors can pay off their debts in that devalued dollar. Which is "cheaper." More dollars means it's easier for you to pay your debts. The fact that the dollar is devalued is the creditor's problem, not the debtors.

2. Many countries' central banks are inflating, so the dollar is retaining its "value" in relation to the others.

they cheerlead Fed inflating (as I define it) but call it something else, just up to the point where it reaches the wage earner. And then there's a problem.

Good point.

no normal folks are going to be making any more money for a LONNNNG time.

Yes. Think about who's first in line for the "new" money. As we know from today's events, the Fed is buying about $1 trillion dollars worth of long-term treasuries as well as various forms of garbage assets. So the US Treasury has lots and lots of that new devalued money in its possession . . .

. . . which it's been giving -- hand over fist -- to banks and other large institutions. Whether it goes directly to Goldman Sachs, JP Morgan Chase, and Citigroup or indirectly, by passing through AIG first, it's going to those who are ALWAYS first in line.

Devaluation will make exports more attractive? Well, if we had much in the way to export, that might be some consolation, but the U.S. doesn't. What's more, you can be sure that further attempts to devalue will spark competitive devaluations. But really this is a nonsense because the U.S. has very little to sell.

The prop that allows the U.S. to seemingly "get away" with currency devaluation via unsterilized purchases of sovereign debt is not long for this world, since, "if my sources are correct" the days of the dollar's hegemonic reserve currency status are numbered.

On a slightly different (Federal Reserve) note:

The only hope the U.S. has, in theory, of reducing its crushing debts is to allow gold to be officially revalued at a much higher rate, but I suspect that the PTB do not have the supply to take advantage of such a revaluation even if they were inclined to do so which they most assuredly are not. I will also add that a bit of research shows that over the last few years it is taking increasingly larger sales of gold toby central banks to knock the price of gold down.

The authorities are running out of time and PMs. If you think today's action was impressive, hang on to your hat, as sixty dollar daily moves up in gold will seem routine within a year.

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About Me

I'm a lawyer in my early 40s, and after looking for a way to do something other than the practice of law, I'm resigned to the fact that I can't earn bupkis doing anything else. I like lots of things, and I like to talk about them incessantly.